Saturday, August 15, 2015

(The Big Disrupt) Pay TV: Who'd Be A Pay TV Provider?

The last few years have not been
good to be a pay TV provider with the whole industry losing subscribers and the
goodwill of the one they have left because the industry’s notoriously bad
customer service but the future looks even worse when you look closely.

The whole Pay TV industry is
chasing two groups of TV consumers, cord cutters and cord nevers, who have
chosen to either abandon or avoid entirely the cable bundle to sign up with
over the top (OTT) services like Hulu and Netflix who offer a large library of
content at cheaper prices than their Pay TV counterparts. This trend sends
chills through Pay TV executive’s spines as cord cutters and cord nevers are
their future customer base and find themselves having to compete with popular
and well-established OTT services in the open marketplace to get them back.

This puts Pay TV providers in
the unenviable position of having to negotiate a fine line where they have make
sure their own OTT services don’t cannibalize their pay TV subscribers like
other OTT services are. However, this
problem is nothing compared to the quagmire that Pay TV providers face: entering
their industry’s number one growth market knowing that they’ll lose money or
make significantly less than they make now. Pay TV providers, like any other
company in any other industry, strive to make a return on dollars spent and thanks
to low OTT APRU (Annual Revenue Per User), Pay TV providers over the next few
years are going to find it really difficult to pull it off.

However, Pay TV providers will continue
to make money from their large pay TV subscribers bases and Pay TV executives
are well aware that they’ll see significantly lower subs and revenue in the OTT
market and see it as a way to reach consumers they lost or never had. What Pay
TV executives would be really be concerned about is the industry wide
subscriber loss which saw Pay TV providers as a whole lose 550,000 subs in a
quarter and the large retransmission fees they have to cough up to keep popular
broadcast and cable networks in their cable bundles.

Pay TV providers hate paying
these large transmission fees with every fiber of their being as it affects
their ability to compete effectively and feel extorted to the point they’ve actively
lobbied government officials to address the issue. It looks like their lobbying
efforts paid off with FCC Chairman Tom Wheeler looking at removing exclusivity
laws on the books that gives broadcast and cable networks an ungodly amount of
leverage over Pay TV Providers, particularly at the local level. This will
likely lead to an epic battle between the cable and broadcasting lobbies that will
last months or most likely years as both sides are unlikely to back down even
in defeat.

Retransmission fees makes up
for a huge chunk of most broadcast and cable network’s revenue and would put a
lot of downward pressure on their business for obvious reasons if they lose
this battle as they won’t be able to command the same fees they do now by a
long shot. Broadcasters may have ready themselves for the tough road ahead as
pay TV providers have a winning argument and a FCC Chairman who would probably
make the same argument if he was still head of NCTA (National Cable and
Television Association).

However, looking at the numbers
provided by SNL Kagan, it looks like Pay TV providers are targeting low hanging
fruit as in 2015, premium and basic cable networks accounted for $37.9 billion
of retransmission fees Pay TV providers had to cough up while broadcasters
accounted for only $6.3 billion[1].
While retrans fees pay TV providers had to pay broadcasters saw more growth
over the last decade than fees paid to cable networks, Pay TV providers are
projected to pay just shy of $1o billion more in 2018 than they do now to cable networks as opposed to the $2.3
billion they’ll pay Broadcasters in the same period[2].

The obvious answer to the
problem would be for pay TV companies to keep the cable networks in check but
that’s easier said than done when cable networks produce many of the commercial
and critically acclaimed shows on television, period. This gives premium and basic
cable channels such as HBO and AMC a lot of bargaining power as they produce commercially
successful shows like The Walking Dead and Game of Thrones Pay TV providers can’t
afford to lose out on. Popular cable
networks like HBO have buffered their already powerful bargaining position as
they can explore other ways to distribute their in demand content to those who
already subscribe to their cable channel (HBO Go) and those who don’t in
partnership with other content distributors (HBO launching OTT service HBO Now
in partnership with Apple).

However, in exploring new ways
to distribute their content such as OTT and TV everywhere, cable networks are subject
to same problem of low ARPU and thus lower revenues in general. However,
network executives, much like their Pay TV counterparts, see these new
distribution models as a way to reach cord cutters and cord nevers.

In sum, all this puts pay TV
providers in an unenviable position which provokes the question who would be
pay TV Provider indeed.